Capital gains tax and your investment property
Capital Gains Tax (CGT) is tax that’s paid on the difference between the property’s ‘base price’ (what you paid for it) and its sale price (what you sold it for).
As a really simple example, say you bought a property for $100,000, then sold it for $150,000. You would pay CGT on the $50,000 surplus (AKA the capital gain).
Of course it’s never that simple. In the real world, while the sticker price might be $100,000 for the property, you’ll have other costs associated with the purchase. This will include things like stamp duty, professional fees (such as lawyers or auction fees), brokers fees, loan establishment costs etc. Those expenses are added to the cost of the property. This new total is known as the ‘cost base’.
For investment/rental properties, this cost base isn’t a fixed total: it’s cumulative. A lot of the money you spend on the property can be added to the cost base. This is good for you, as it reduces your capital gain, meaning that you pay less tax. There are different ways to calculate your capital gain: the discount method, the indexation method and the other method. The ATO have a handy guide on each of these calculations, which will tell you which method applies to you. They also have an online calculator that you can use to determine your capital gains tax exemptions. Their site also lets you know about some of the other factors that might affect how much you’re paying.
Generally speaking, for properties purchased after 1997, that have been owned by you for more than 12 months, the following types of expenses can be added to the cost base.
What can be added to the cost base:
Any costs incurred in the management of your properties can be added to the cost base. This can include things like:
- Property management fees, including advertising
- Rates (including water rates)
- Legal fees as they relate to the property’s sale and management
- Personal expenses incurred in property management (such as reasonable travel expenses)
- Improvements and renovations to the property.
What can’t be added to the cost base:
- Expenses paid by tenants, such as utility bills
- Interest on loans taken out to purchase the property
- Insurance costs
- Any expenses mentioned above that were incurred while you were living in the property (you need to be earning assessable income from the property to make cost base adjustments).
There are other points to check as well, such as how long you’ve owned the property. To claim eligible expenses as capital gains exemptions or as capital losses, you’ll need to keep documentation (such as receipts, invoices and bank statements). If you don’t have these records (for whatever reason), it is possible to have an estimate made by a professional (such as a supervising architect or experienced builder) to determine the value of works undertaken.
Capital gains tax can be a tricky total to calculate, as well as manage come tax time, so it’s worth discussing it with your accountant. It’s calculated as part of your income tax, so they’ll be able to help you work out if you have capital losses to offset with capital gains, and let you know what other expenses you might be able to include. They’ll also help you calculate any depreciation and include that in your totals as well.
Knowing what can be added to your cost base will help you make better decisions in future about how to manage your property, including when it might be worth renovating to make your property more attractive in the rental market. It might seem like a lot of record keeping now, but you’ll be happy that you kept careful record when it comes to tax time the year after you sell!